Got a steep college bill? What to do now

JenniferOpenshaw

NEW YORK (MarketWatch) -- If you're a parent who's been hit with financial body blows because of a job loss, depreciated assets or even just higher-than-expected tuition, you may be worried about how to pay the college bills coming due now.

Here are four tips for what you can do right now to make that payment:

1. Negotiate your bills

Josh McWhorter, a financial adviser and president of Black Oak Asset Management, suggests negotiating with your lender. After all, more banks have been forced to do just that as consumers have struggled to make mortgage payments. So why not your college loan?

"There are so many who can't or won't pay bills that it's better to get something than nothing," McWhorter says. "Maybe they'll work out a payment plan or defer the payment, or even reduce the interest costs."

McWhorter said universities, who themselves are struggling in this economic climate, may be more willing these days to accept lower payment if it means avoiding a non-payment. As with most things in life, you won't know until you ask.

2. Reach out to Uncle Joe

A relative who's financially better off might be able to help you foot the college bill. But did you realize it can help them, too?

By gifting money to you, whether in the form of a check to you or the college directly, your relative can reduce their taxable estate and enjoy passing on their assets today, while they're still alive.

"If a great uncle has some money, maybe you can talk to them and say, 'Would you mind helping?'" McWhorter says.

The tax laws allow anyone to gift up to $13,000 per year to any one person without a tax penalty and up to $1 million over their lifetime. As an example, if you have 10 people you want to gift money to and you give them $20,000 each, $7,000 per person is over the annual gift tax exclusion. However, you can apply that $70,000 (10 x $7,000) over the annual gift exclusion toward your lifetime exclusion of $1 million. That means you won't pay taxes on that gift and you can still give more than $13,000 in any one year if desired.

And, even better, if your benefactor pays the school directly, that tuition payment may be entirely excluded from the gift tax. Check with a tax professional to make sure the payment on your student's behalf qualifies for that exclusion.

3. Borrow

Borrowing for college has taken on new meaning with the Internet since consumers can now borrow directly from others -- relatives or not -- and possibly get a more attractive rate. But if you're borrowing from a relative or someone through less formal channels, be sure to get a contract or promissory note.

"You might have the best relationship but I can't tell you how many times I've seen money tear families apart," McWhorter says. "The contract also protects you in the event the IRS looks at it and questions whether it was a taxable gift."

4. Tap your employer

Some employers offer tuition reimbursement, while others will make loans to employees, something more common in smaller companies. Either way, your HR department is the contact. Be sure to ask if any help may be considered taxable income.

There's also your 401(k), a last resort if you care about your own retirement. If you're tempted to tap that resource, consider a so-called "72-T" distribution, where you take equal payments over a period, usually five years, to avoid the penalty for withdrawing before the age of 59-1/2.

"This can also provide some cash flow if you're searching for a job," McWhorter says.

The rules are complex and if you get it wrong you risk a tax penalty, so talk to a financial adviser or tax professional.

Saving for later

If you're not grappling with tuition bills right now, but you are putting aside money for future college costs, then consider McWhorter's 33% rule.

After struggling himself over how to help one family decide how to pay college bills amid disagreements about who should pay what, he came up with a simple formula:

Parents pay 33%. Through long- or short-term investments, savings plans, or current income. "If our clients deplete their retirement accounts for their kids' education, that's going to crimp their retirement. You can always borrow for school but you can't for retirement."

Student receives scholarships or borrows 33%. Students and parents should focus on identifying scholarships for which they might qualify in the future. As a child's career interests shift from, say, teacher to engineer, the opportunities might change, but students should keep the scholarship criteria front and center. If they're not able to get scholarships, then loans become the backup funding source for this portion.

Student pays 33%. Whether through saving money before entering college, working part-time during college, or participating in a work-study program, the student is responsible for directly paying this portion.

Whether you're paying for college right now or planning ahead, "The last thing you want to do is to take on debt," McWhorter says. "It's not the parents' job to go into the poorhouse to get kids through college."

Jennifer Openshaw, founder of the original Women's Financial Network, is author of "The Millionaire Zone." Through SuperFutures.org, she offers a youth leadership program at the United Nations. You can find her on Facebook, Twitter @jopenshaw or email at jennifer@familyfn.com.

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